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Despite increase in interest income, Trustmark Corporation (TRMK - Snapshot Report) failed to keep its earnings streak alive primarily due to higher expenses. The company reported fourth-quarter 2013 earnings per share of 42 cents (after the closing bell on Jan 28), which lagged the Zacks Consensus Estimate of 46 cents. Moreover, results were marginally lower than the prior-year quarter figure of 43 cents.

It should be noted here that, as of Dec 31, Trustmark’s common shares outstanding increased 3.8% to 67.4 billion from the prior-year quarter, which was one of the reasons for the year-over-year decline in earnings per share.

For the full year 2013, Trustmark recorded earnings per share of $1.75 versus $1.81 in 2012. Moreover, excluding one-time merger costs and litigation expenses of $8.3 million, full-year 2013 earnings per share of $1.87 missed the Zacks Consensus Estimate of $1.91.

Results were adversely impacted by higher expenses and lower non-interest income, partially offset by increase in net interest income. Additionally, capital and profitability ratios deteriorated. However, increase in loan recoveries, growth in loans and deposits as well as improvement in credit quality were the tailwinds for the quarter.

Net income for the quarter came in at $28.0 million, up 1.2% from $27.7 million in the year-ago period. However, for the full year, net income came in at $117.1 million, dipping from $117.3 million in 2012.

Performance Details

Trustmark’s full-time equivalent (FTE) total revenue was $150.5 million, up 11.2% year over year. Moreover, it beat the Zacks Consensus Estimate of $145.0 million.

For the full year, total revenue (on FTE basis) was $603.0 million, up 7.4% from $561.2 million in 2012. Moreover, total revenue surpassed the Zacks Consensus Estimate of $565.0 million.

FTE net interest income (excluding provision for loan loses) increased 22.8% year over year to $105.6 million. The increase was primarily due a rise in interest income as well as lower interest expense. Moreover, net interest margin (on FTE basis) increased 16 basis points (bps) from the prior-year quarter to 4.10%.

Non-interest income decreased 9.6% from the prior-year quarter to $38.7 million. The decline was primarily due to a slump in mortgage banking business (nearly 54%) and higher other net expense (almost 139%), partially offset by increase in the remaining components.

Non-interest expense rose 20.1% year over year to $104.9 million. The increase was due to rise in all the components, except for a 5.2% decline in other real estate or foreclosure expense.

Asset Quality

Asset quality improved during the quarter. The ratio of total nonperforming loans to total loans was 1.10% as of Dec 31, 2013, down 31 bps from Dec 31, 2012.

Net charge-offs to average loans was 0.01% as of Dec 31, 2013, down 28 bps from 0.29% as of Dec 31, 2012. Moreover, recovery for loan losses increased substantially to $2.0 million from $0.5 million in the prior-year quarter.

Loans and Deposits

As of Dec 31, 2013, loans held for investment, were $5.8 billion, up 3.7% from $5.6 billion as of Dec 31, 2012. Total deposits were $9.9 billion, up 24.9% from $7.9 billion as of Dec 31, 2012.

Profitability and Capital Ratios

Trustmark’s capital and profitability ratios deteriorated in the quarter. As of Dec 31, 2013, Tier 1 leverage ratio was 9.06%, compared with 10.97% as of Dec 31, 2012. Tier 1 risk-based capital ratio was 12.97% versus 15.53% as of Dec 31, 2012. Total risk-based capital ratio came in at 14.18% against 17.22% as of Dec 31, 2012.

The return on assets came in at 0.95%, declining from 1.12% as of Dec 31, 2012. As of Dec 31, 2013, return on common equity came in at 8.26%, decreasing from 8.56% as of Dec 31, 2012.

Performance of Other Banks

BB&T Corp. (BBT - Analyst Report) and U.S. Bancorp (USB - Analyst Report) surpassed the Zacks Consensus Estimate in fourth-quarter 2013. The encouraging results were primarily driven by a decline in provision for credit losses and lower expenses for both the companies. First Horizon National Corporation (FHN - Analyst Report) beat the Zacks Consensus Estimate on the back of lower expenses.

Our Viewpoint

Though top line improved in the reported quarter, we remain skeptical about the sustainability of the same, given the low interest rate environment and limited scope to improve fee income. Further, increasing expenses adds to the woes.

Nevertheless, growth in loans and deposits is expected to drive the company’s organic growth going forward.

Currently, Trustmark carries a Zacks Rank #3 (Hold).

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